Is your crypto exchange prepared to issue 1099-Bs? Here’s how to do it easily

Taxes are one of the few certainties in life and major tax changes are coming for crypto exchanges and wallets very soon. Will you be ready for them?

While cryptocurrency owners have been required to report their crypto gains and losses on income tax for a few years now, crypto exchanges and wallets have not had to provide information to the tax authorities about their customers and transactions. But that’s all changing, as new federal regulations will require crypto exchanges and wallets to provide tax documents in the form of a 1099-B to their clients. And it’s not going to be an easy process.

To be prepared for this change, you need to know exactly what is coming quickly down the road for crypto exchanges and wallets, what kind of reporting will be required of you, and why it might not be a good idea to build these capabilities in-house.

What’s on the horizon for tax reporting

Despite cryptocurrency’s intention to be decentralized, federal tax rules have caught up with crypto owners, who must report their crypto holdings as property and pay any capital gains tax associated with it. However, unlike brokerages or exchanges, crypto exchanges and wallets have not had to report customer information, transactions and gains or losses to the IRS, and issue a form to customers for their own tax purposes.

However, this has changed with the Infrastructure Investment and Jobs Act, also known as the Infrastructure Bill, on November 15, 2021. The bill expands mandatory tax reporting for crypto transactions, and starting in 2023, crypto exchanges and wallets will be required by law to generate and issue 1099-B forms — or something like that — to its customers, the federal government and every state that requires reporting. And with nearly 600 crypto exchanges out there – with the largest having a volume of $15.9 billion – they have a lot of work ahead of them.

A 1099-B—like other 1099 forms—is used to report non-W2 income earned over $600 and is records of freelance or gig work, interest received, dividend payments, and more. Even certain purchases using cryptocurrencies can trigger a taxable event that applies to the $600 threshold. A 1099-B form is specifically issued by brokerage firms and exchanges and contains a record of all transactions made, the instrument used, gains or losses, and more. The message here is clear: the IRS views your exchange as a brokerage or barter. And as such, you need to track and provide an overview of all crypto transactions per customer made on your platform. You may also need to report existing tax liabilities as reserve deductions as well.

Because this is required by law, you do not have the option of doing nothing – or you can and face the penalty. You need to build your ability to handle this massive amount of data collection and tracking, so that will come next year. But how will you do it?

How to prepare your exchange

Crypto exchanges and wallets must prepare for this new tax regulation end-to-end, from collecting customer information to tracking and attributing transactions to generating a form that complies with the tax law. What kind of information does a typical 1099-B contain? You can find a customer’s name, address and social security number – and SSNs require their own process to collect and verify before 1099-B issuance can begin. It also contains a list of every transaction made, including what was sold, the date sold, amount, profit or loss, and other important information.

There is a lot of data to track and a lot of reporting to be correct. Your first thought might be to build these capabilities in-house, but you’ll face a number of obstacles to doing so, such as:

• Compliance: There are a number of challenges with building internally. The first is compliance and making sure the way you collect and report information complies with this new tax law. And you can be sure that the IRS will be keeping an eye on crypto exchanges and wallets to make sure they get it right.
• Speed: Another challenge will be the speed at which you can design, develop and deploy these new features – especially when they need to be ready by the end of the year. Do you have the resources and budget to immediately turn your attention to solving this problem?
• Cost: Cost is another challenge if you build in-house. Consider the research, design, procurement, development, testing, and maintenance costs of building, operating, and maintaining the backend infrastructure for this feature. Does your headquarters have the engineering resources to prioritize this as well?
• Maintenance: Finally, are you prepared to commit to the ongoing work of running this tax process year after year and maintaining the underlying infrastructure? Who will create the software updates to keep up with the evolution of the tax legislation? Which team will own this?

Use custom APIs

You don’t have to build your solution yourself. The best approach to get started quickly and easily is to use APIs to track and generate your 1099-Bs. Instead of building all these capabilities in-house, APIs will integrate with your system and easily pull all this data to generate the forms you need. In addition, custom-built APIs from a knowledgeable provider will ensure that you not only comply with tax laws, but that you stay on top of any changes and ongoing maintenance of the API. Ultimately, going with API integration will save you time, money and resources and prepare you for the new laws to come into effect.

Tax changes for crypto exchanges

An old saying goes that there are only two things that are certain in life, and one of them is treasure. Crypto exchanges and wallets face an inevitable future of compliance in terms of transaction reporting to the IRS – and possibly even more expanded reporting, including the taxability of stakes. However, another old adage says that a pinch of time saves nine, so if crypto exchanges and wallets start building out their capabilities today, they won’t be fooling around when the IRS comes calling.